Meta

Easier to slip into recession today than in 2008

The crisis had a major negative effect on the Romanian economy: it had lowered the potential GDP. While mostly a theoretical concept it is not hard to feel that this is true. The potential GDP is that value around which an economy can grow employing all available resources and not create inflationary pressures.

I know, it sounds very hard to achieve and harder if you do not know the exact value of the potential GDP. Nevertheless, one can assume that in the years before 2008 Romania could grow at a pace of 6% per year without creating inflationary pressures. Now that value it is much lower. How much lower?

Well, there are some estimates by the NBR. They say that up to 2008 the potential GDP for Romania was around 6.25% while today is between 2.5% and 3%. A drop of 3% in couple of years. And the future looks bleak.

There is one more problem for us stemming from a lower potential GDP: higher probability of recession. In 2008 it took a huge global shock, together with a monetary fiscal and policy shocks (both restrictive) to bring the economy into recession territory. The huge brute force was needed because of the high potential GDP. That “problem” does not exist today. With a low potential GDP and a small open rigid economy a small negative shock can push the Romanian economy into recession.

Again to be ironic and cynical, besides the negative shocks from the global economy which will hit us with 100% certainty, it will require less “effort” from our policy makers to screw it up. Let’s just watch and see what they come up with this time. I can guarantee it will not take much.

Post navigation

5 thoughts on “Easier to slip into recession today than in 2008”

I don’t know how the people at the NBR got to that nomber but if I recall correctly we only managed to reach growth rates close to 6% when government consumption (and inflation) rose sharply (remember 2008). I

I remember reading a thesys of one of my former macro professors at ASE indicating a potential GDP around 4-4.5% before 2008. I think it is a more accurate value then the one calculated by the NBR.

Let’s say that the Romanian government no longer has any money left to pay their public servants. This will mean that they will have to fire a bunch of people.

And these people will still have to eat. They will have no choice but to get hired in the private sector.

This will shift the balance. The budget will decrease while the private sector will increase.

I personally think that the potential is still huge. Imagine what will happen if 1 million public workers will start working in the private sector. The real economy will increase by the output of almost 2 million people.

Let’s say that it takes 10 billion euros to pay 1 million people.

Before: 10 billions were distributed from the private sector to the public sector Balance: 10 billion spent but wasteed
After: 10 billions stay in the private sector. 10 billions are produced by the people who get hired inside the private sector. Balance: 10 billions spent or invested but not wasted + 10 billion no longer wasted + 10 billion produced.

I think Romania is in a great depression today, and it will stay here for years, which makes talking about recessions … funny🙂. But in the same time I think you make a confusion and you are mistaken.

In 2008 Romania was in a balance of payments crisis, which started to be more and more filled, to say like this, even from the beginning of the year. Romania didn’t even needed a “huge” shock, like you call it, in order to end up where we are today. This would have happened to us even without the international crisis.

And the probability of recession in 2008 was huge, much higher than it is now, because even from the beginning of the year the economy started to show signs it can’t sustain the crisis anymore. Romania was actually in a death spiral, close to its end.

Now of course we will need a couple of years to solve our problem, which most probably won’t even happen, as in this country people don’t seem to even know that balance of payments crisis exist. I don’t know how could they take any specific measures, as a result. So I think we are in God’s hands. As BNR and the state did nothing, so far, in the matter.

What I wanted to say is that in 2008 the Romanian economy had 0% potential, just like today it has 0% potential. Just going down on the death spiral, while you record a +, which is actually more like a -, it doesn’t mean growth. Romania was a richer country, and had more potential, in 2004, than in 2008.